Jun 05 2014
Yesterday, Chairman Patty Murray (D-WA) and the Senate Budget Committee held a hearing on the Impact of Student Loan Debt on Borrowers and the Economy with majority witnesses Rohit Chopra, Student Loan Ombudsman at the Consumer Financial Protection Bureau, and Brittany Jones, recent college graduate and Former President of the Student Virginia Education Association.
In her opening statement, Chairman Murray addressed how student loan debt has lasting repercussions for young adults as they start their careers, and holds back the economy by limiting borrowers’ economic activity.
“More young people than ever before are dealing with more student debt than ever before. And that can have lasting consequences. Americans who took out school loans can find it difficult to save and accumulate wealth. A recent study found that college graduates without student debt had accumulated seven times more wealth than those who are paying back school loans.
“Crushing student debt isn’t just hurting borrowers. There is mounting evidence that student debt is also holding back the economy. Historically, young Americans have been a source of economic activity, as they set up households and as they start their careers. But today, many are finding it difficult to save up for a down payment on a home. And the high monthly bills to pay back student loans can disqualify many people from getting a mortgage.
“Student debt can also stifle entrepreneurship. Young people, who dream of starting up their own businesses aren’t able to take the risks and the business loans that are usually needed when launching a start-up. Paying off student loans can also prevent young people from saving for retirement, or making the kinds of purchases that help further the economic recovery,” Murray said.
Murray called on Congress to ease the burden of student loan debt by passing legislation like the Bank on Students Emergency Loan Refinancing Act
“The Bank on Students Emergency Loan Refinancing Act is a bill from Senator Elizabeth Warren that I’ve cosponsored, along with several of my Democratic colleagues. That bill would allow borrowers to refinance their federal student debt. The Congressional Research Service estimates that this bill would let borrowers save $4,000 on average. Passing that legislation would put more money in borrowers’ pockets, so they can make ends meet, so they can make a down payment on a house, so they can start new businesses and grow the economy. Right now, people can refinance their home loans or their business loans when interest rates drop. This bill would let borrowers with federal student debt do the same. And, this should be a bipartisan issue,” Murray said.
Read Chairman Murray’s Full Opening Statement here.
Witness Brittany Jones, recent college graduate and former President of the Student Virginia Education Association, explained her story of taking out $70,000 in student loans in order to fund her education and advance her dream of becoming a teacher, and called on Congress to help all students trying to further their education.
“Student loan debt has been the driving force of my decisions for the last eight years of my life, and according to my current repayment plan, it is projected to be for the next 25 years of my life, well into the years for which I should be planning a retirement. It should not be that way.
“Senators, you have the power to make sure it isn’t this way any longer. You can take actions to help make college more affordable, so all students have a fair shot at pursuing their dreams. “Degrees not debt” should be our collective goal. I urge you to help increase student aid, especially for those who need the most financial help. I urge you to help make student loans more affordable, including by allowing refinancing of those loans as legislation from Senator Warren would do. And I ask you to look for ways to make careers in public service, like teaching, more attainable by expanding loan forgiveness programs,” Jones explained.
Chairman Murray asked Jones to describe the difference it would have made if she been able to refinance her student loans.
MURRAY: "Your story actually really resonates with me. All of my brothers and sisters and I went to college on Pell grants and student loans to finance our education and I taught young children early on in my career which is actually what got me into politics to begin with, but the financial burden of student loan debt is considerably more than when I graduated so I share your understanding and appreciate your being here. In your testimony you said that you paid over 600 dollars a month to cover your federal student loans. How much was your monthly take home pay at that time?”
JONES: “At that time my monthly take home was roughly 1,500.”
MURRAY: “OK, and do you have any money saved?”
JONES: “I do not. I’ve been using my savings to pay back the loans that I’ve taken out for my undergraduate degree.”
MURRAY: “When you ran into difficulty repaying your, all of your loans, did you servicer offer any alternative repayment plan? Like the income based repayment option?”
JONES: “They did not. I did not learn of the program until very recently, and I believe had I been offered that program my payments would’ve been roughly 150 dollars a month as opposed to the 600 dollars a month I was paying.”
MURRAY: “So if you’d been able to take advantage of the IBR you would’ve reduced that payment to 150 dollars… Do you know how much you would save if you had been allowed to refinance your student loan?
JONES: “Over 10 years I would’ve been able to save more than 4,000 dollars.
MURRAY: “More than $4,000. How would that have impacted your life?”
JONES: “Well, as educators you know, we always have to buy materials for the classroom because the funding is limited. So I think having the extra funding available would make life easier. Definitely, I would be able to save for the future and I would be able to plan for retirement as opposed to wondering if it will be possible.”
MURRAY: “So I have to speculate that if you had known about IBR you’d be in a much better place today. But nobody told you.”
Read Jones’ testimony here.
Witness Rohit Chopra, Student Loan Ombudsman at the Consumer Financial Protection Bureau, explained the domino effect student loan debt has on the economy and individual borrowers.
“Professionals on the front line of the housing industry – from real estate agents to builders to mortgage bankers – have all described the challenges posed by student debt to homeownership. There appears to be a number of specific effects, including: down payment accumulation, mortgage qualification, and move-up purchases. According to a recent survey by the National Association of Realtors, 49 percent of Americans cited student loan debt as a ‘huge obstacle’ to homeownership.
“Small business plays a critical role in creating opportunity and wealth in our economy…But student debt may be stymying the efforts of entrepreneurs to sustain and grow their businesses…In submissions to the Bureau by coalitions of small businesses and startups, groups cited a number of potential negative impacts of student debt on entrepreneurship, such as access to credit and willingness to take financial risks.
“Student debt can also have more long-term impacts on an individual’s financial security. Due to the shift away from defined benefit plans and toward 401(k)s, IRAs and other defined contribution plans, ensuring a secure retirement will be largely self-directed for most young workers. Young workers who are able to make early, sizable contributions to these plans can generate significant retirement assets over the course of their careers… But student debt may be impeding workers from making sizable contributions – or even contributing at all.”
Read Chopra’s testimony here.
Murray asked Chopra if loan servicers are doing enough to ensure borrowers are aware of their options.
MURRAY: “You've worked directly with a lot of student-loan borrowers. And your reports have talked about some of the macro-economic consequences. But let me ask you, have you encountered a lot of stories like Brittany's?”
CHOPRA: “Yes. One of the top issues that borrowers identify is difficulties repaying, restructuring, enrolling in loan-modification programs, and staying current to avoid delinquency and default.”
MURRAY: “So our services are not reaching out and helping young people, or even adults, learn what their options are today?”
CHOPRA: “Well, we learned a very painful lesson in the years around the financial crisis and the mortgage servicing market. There is some fundamental incentive misalignment where what may be good for the loan owner, or the investor, and what may be good for the borrower, is not actually the outcome. And market forces, due to modern structure finance, can often cause terrible outcomes for everybody.”
MURRAY: “I've heard from a lot of people today who are paying back loans that they don't know how much they owe, they're having trouble getting that information, they don't get yearly statements. Brittany's nodding her head. Is that something that you hear a lot as well?
CHOPRA: “Well, I think it's not actually just not knowing about it, it's also -- we hear from many borrowers, and we see it in the data, that a number of borrowers are reaching out, and are seeking help, but are often told to choose forbearance. You know, we have continued to hear complaints from servicemembers and military families, that they call about their Servicemember Civil Relief Act benefits, and are simply told, ‘Well, you know, just do a military forbearance.’ That option will keep interest accruing, it will make the debt burden harder. But it is certainly easier for the servicer to accomplish, rather than actually walking them through the steps to enroll in their legal entitled benefits.”
Senator Jeff Merkley (D-OR) discussed with Chopra how student loan debt and rising tuition can worsen wealth inequality and impact the aspirations of America’s youth.
MERKLEY: “…let’s think about how this amplifies, if you will, the inequality of wealth. If our students are unable to begin purchasing a home earlier in their life, and homeownership is the major ability and major builder of personal family wealth for working Americans, doesn’t that amplify the inequality of wealth in our society?”
CHOPRA: “As I note in my testimony, there is a large gap in certain simulations of graduate who do have student debt and those who don’t in terms of what those final outcomes might be for their retirement balances. So traditionally, younger workers have been able to stash cash away for a home down payment or saving for retirement, but if they’re not able to make those early contributions they lose those compounding effects, and so student debt, if it soaks up some of that ability to invest and save, the long-term repercussions could be real.”
MERKLEY: “Meaning they amplify the inequality in wealth. Thank you. I just wanted to make that point. The thing that I’m most concerned about is the impact on aspirations. I live in a working class community, my children go to the same public high school that I went to, and what I am hearing is a feeling among high school students that there is not a path in which they have an opportunity to thrive, that is to pursue their potential, which is then affects, actually, their behavior in high school as to whether or not they are going to-how hard they are going to work to make that path possible. My concern here is that this is the heart of the American dream, that there is a full opportunity to thrive for every American, whether they’re the child of a mechanic, the child of a janitor, the child of a CEO, is this issue given this huge hurdle of college debt, is that really compromising that vision?”
CHOPRA: “The change in aspirations from the stories we are constantly submitting to the public record illustrate many of the themes you just discussed.”
Senator Debbie Stabenow (D-MI) emphasized that the Bank on Students Emergency Loan Refinancing Act would give students a fair shot, without adding to the deficit.
“…I don’t think we should say that in the meantime students should not have the same opportunity that all the rest of us have had when we want to finance a house—which is to get the lowest interest rates that are out there today. And I do also want to say before asking questions, is that the good news for this refinancing bill, unlike other things that Congress has done over the years, the bank bailout, all kinds of other things, you know. This is paid for. That’s the good news on this one. So this is not adding to the deficit. What we’re proposing is actually to ask everybody to chip I, pay their fair share to grow the economy and create a fair shot for everybody. So it’s fully paid for,” Senator Stabenow said.
Senator Sheldon Whitehouse asked Jones to explain how the burden of student loan debt has affected personal decisions in her life.
WHITEHOUSE: “Ms. Jones, thank you for your testimony. You’ve been a terrific witness that has brought a real dose of reality to this hearing. How has your student loan debt affected other personal decisions in your life, like to own a home, to have a family? How has that burden of debt changed what you might do with your life?”
JONES: “I have this conversation with my mother a lot because she’s now asked maybe fifteen times why is it I’m still pursuing the education field. Actually, to pay for some of my college education she borrowed against her own retirement, so that I could in fact become the teacher I want to be. And the decision to stay—stick with education was driven because of the desire to want to see the future generations have the same chances we have. I will say the decisions to take out more student loans made going back to school a hard decision to make as referenced in my testimony. I couldn’t justify using more of my mom’s retirement even just to pay for the masters.”
WHITEHOUSE: “And what’s it done to the likelihood of your owning a home?”
JONES: “Well considering I don’t have any funds right now, or down payment, that’s been put off for a few years. Bu hopefully in the future I can work something out, or we can work something out with the refinance bill so that I can start saving again.”